Ron Baron (Trades, Portfolio) is responsible for building up Baron Capital. Atypical of gurus he follows a growth at a reasonable price strategy with an emphasis on growth.
More in line with Warren Buffett’s teaching his investment horizon is extremely long term. Baron Growth holds for 12 years on average compared to the average mutual fund’s holding period of two years. Baron has invested half a billion in the firm’s funds so his interests are pretty much aligned with outside investors. The investment magazine Barron’s interviewed him, yielding three interesting investment ideas I want to discuss in a bit more detail.
Hyatt Hotels
Real estate is very interesting to protect against inflation. That plays into the investment in Hyatt Hotels (H, Financial). The Marriott-Starwood merger is a bit of a concern with the combined chain having a better loyalty program that is well positioned to steal away some corporate clients. At the same time, it may fail at integration, and Hyatt could steal away some of the franchisees.
That could be an easy source of growth. Baron thinks it’s worth $75 to $80 while it only trades at $48. The company trades at 1.6x book value, 11x EV/EBITDA, and debt is fairly limited at two turns of EBITDA or $1.4 billion. First Eagle Investment also came up with an interesting hotel pick earlier this month.
Inovalon Holdings
Inovalon Holdings (INOV, Financial) collects data on patients' health and treatment histories and delivers it to hospitals and doctors who are treating them. Baron likes it because he believes the company helps to cut “system costs” of health care, which he thinks is a terribly inefficient sector. He also sees great growth potential.
It’s a $500-million-revenue business that makes $150 million a year. It trades at $18, so it has a market cap of $2.7 billion. It has $500 million in cash. It has the potential to be up 10 times in 15 years. We own 8%.
The company trades at 3.7x book value and 17x EV/EBITDA. Debt seems manageable at just two turns of EBITDA. It's quite a popular short with 13% of the float held short.
Tesla Motors
Baron’s calls Tesla Motors (TSLA, Financial) his best idea, but it is only the 12th-largest holding in his GuruFocus-tracked portfolio –Â although he did add to it in the fourth quarter. Baron doesn’t appear concerned about the problems with the model X as there were some with the model S as well; they will get fixed. He drives Teslas himself and likes them for their safety and style. I have to say, though, I see them driving around here in Europe, and it’s a very large U.S.-style car. Because of their novelty and green factor they are getting away with it, but I bet Tesla will have to come up with new models better suited to the euromarket if it wants to go big here. However, Baron thinks long term.
In five years, they said they’ll do 500,000 cars a year. At 500,000 cars a year, that business should be doing $35 billion to $40 billion of annualized revenues and have an operating profit of $6 billion to $7 billion a year. I think that would be worth 20, 25, 30 times earnings. That makes it a $120 billion to $130 billion business now selling for $30 billion. So that’s a quadruple in five years.
In the meantime Tesla trades at a forward P/E of 75x, P/B of 30x, EV/Revenue of 8.5x and it has about $2.7 billion of net debt.
